Can I Cash Out My HSA After Leaving My Job?

A Health Savings Account (HSA) is a tax-advantaged savings account for healthcare expenses, typically paired with a high-deductible health plan. When you leave a job, a common concern is what happens to the funds in your employer-sponsored HSA. The money in the account is yours to keep and manage, as its portability ensures it is not tied to your former employer. The funds can be used for future medical needs, and you have several options for how to manage the account after your departure.

Your HSA Belongs to You

A defining feature of an HSA is its portability; you own the account and all the funds within it, including any contributions made by your former employer. This means that when you change jobs, get laid off, or retire, the HSA remains your personal asset. You do not forfeit the money, and your previous employer cannot reclaim any contributions they made.

This ownership model is a significant distinction from a Flexible Spending Account (FSA). FSAs are employer-owned accounts and often operate under a “use-it-or-lose-it” rule, where any remaining funds are forfeited after you leave your job or at the end of the plan year. With an HSA, the funds roll over year after year and stay with you indefinitely.

Using Your HSA Funds Post-Employment

After leaving your job, you can continue to use your HSA funds for qualified medical expenses tax-free, as your employment status does not alter this benefit. The Internal Revenue Service (IRS) defines a “qualified medical expense” in Publication 502 as costs related to the diagnosis, cure, mitigation, treatment, or prevention of disease. This includes a wide range of costs such as doctor’s office visits, prescription medications, dental treatments, and vision care.

Using the funds is a straightforward process. Most HSA administrators provide a debit card linked to your account, which you can use to pay for eligible expenses. Alternatively, you can pay for medical costs out-of-pocket and then reimburse yourself from your HSA. It is important to keep detailed receipts for all transactions to substantiate that the withdrawals were for qualified medical expenses in the event of an IRS audit.

Withdrawing Funds for Non-Medical Reasons

While an HSA is designed for tax-free medical spending, it is possible to withdraw funds for non-qualified expenses, often referred to as “cashing out.” The financial consequences of doing so depend on your age. These distributions are reported to the IRS using Form 8889, Health Savings Accounts (HSAs).

Distributions Before Age 65

If you withdraw money from your HSA for non-medical reasons before you turn 65, the distribution is subject to two financial penalties. First, the amount withdrawn is added to your gross income for the year and taxed at your regular income tax rate. Second, the IRS imposes an additional 20% tax penalty on the withdrawal amount. For example, a $2,000 non-qualified distribution in the 22% tax bracket would result in $440 in income tax and a $400 penalty.

Distributions at Age 65 or Older

Once you reach age 65, the rules for non-qualified distributions become more favorable, and the 20% penalty no longer applies. While you lose the tax-free benefit, the funds are simply treated as taxable income, similar to a distribution from a traditional 401(k) or IRA. This feature allows the HSA to function as a supplemental retirement account. You can still use the funds tax-free for medical costs but also have the flexibility to use them for other purposes by paying ordinary income tax.

Managing Your HSA Account

After leaving your job, you have a few options for the account itself. The first is to leave the HSA with the current administrator your former employer used. You should be aware that your employer may have been covering monthly maintenance or administrative fees. Once you are no longer an employee, those fees may become your responsibility.

A second option is to move the funds to a new HSA provider. This allows you to shop for an administrator that offers lower fees or better investment options. The most efficient way to do this is through a trustee-to-trustee transfer, where funds move directly from your old HSA provider to the new one. This method has no tax consequences and can be done an unlimited number of times.

You can only contribute new money to an HSA if you are currently enrolled in a qualifying High-Deductible Health Plan (HDHP). For 2025, an HDHP is defined by the IRS as a plan with a minimum annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. If your new job does not offer an HDHP, you cannot make new contributions, but you can still use the existing funds for qualified medical expenses.